Posted by: Contributing columnist, Clarion-Ledger, Business, January 26, 2016: The popularity of the ABC show “Shark Tank” has made it a lot easier for us to explain what we do at Innovate Mississippi. We can now half-jokingly tell people, “We’re a lot like a ‘Shark Tank’ for Mississippi, except our entrepreneurs are better prepared and our investors are much nicer.” The popular show provides an interesting look into the world of angel investing – where wealthy individuals invest in early stage private companies. Until recently this world has been open only to “accredited investors” under strict securities laws, but the passage of the federal JOBS Act and efforts by states to enact crowdfunding have started to change that.
It’s now possible for any Mississippian to invest in an early stage startup Mississippi company through online crowdfunding thanks to rules put in place by Secretary of State Delbert Hosemann. Other states have put similar rules in place but no activity, but Mississippi’s rules were actively shaped by a business working group formed by Secretary Hosemann and by the shear tenacity of entrepreneur Jennifer Gatewood, whose portal (www.PeerElevateFunding.com) was registered and online almost immediately after the rules were put in place. Another portal (www.liaisonequity.net) is now also registered and other portals have at least considered taking on the myriad rules at the state and now federal levels.
In essence, the world of angel investing has now been opened to every citizen of Mississippi and federal rules are in the process of being implemented that will open up the entire country at some point. Any Mississippian can now invest in deals, and any company wanting to get investors can now do so by putting its offering online to seek investors.
As a brief background, it’s important to know that the reason this hasn’t been happening before now is that the U.S. Securities and Exchange Commission has many rules in place regarding how companies raise money through equity or debt securities. While companies can take donations and even presell products through crowdfunding websites like Kickstarter, Indiegogo and others, companies are not yet able to raise money from everyday people online. Securities laws are in place as investor protections, mostly in order to make sure that unscrupulous companies don’t promise the world and steal the retirement nest egg of unsuspecting investors. Similar concerns seem to have also been the primary reason why the SEC has dragged its feet more than three years since the JOBS Act was passed.
With Mississippi deals now allowed and just starting to be offered, online crowdfunding is now a viable option for companies to raise money and for investors to seek investment. I strongly believe that crowdfunding will be a valuable tool for raising money, but considering Innovate Mississippi has worked with more than a thousand companies wanting to raise money over the last 14 years, there are strong considerations that both companies and investors should consider.
For companies, the biggest concern should also be the most unlikely: Any company who is misrepresenting their plans, fraudulently attempting to dupe investors, or even planning to just spend the money and disappear will be well advised to keep hiding and avoid the public and legal scrutiny of crowdfunding. This should be obvious, but needs to be said nonetheless. Beyond that, any company that has a business plan capable of attracting investors and that plans to be open in their communication with a large number of investors can be a good fit for crowdfunding.
On the investor side, the key is to not fall in love with the product and instead consider the product, the market, the financials, the management team, and the business plan as all being equally important. The level of validation for each of those areas should also match the funding level required — with larger funding offerings having much higher levels of technical, market and financial validation. Other concerns around the deal should include the valuation (and therefore what percentage is offered), the type of ownership offered, the structure of the company’s operating plan, and what the company’s plans are for getting investor liquidity. Since these private investments don’t have the ability to sell shares like publicly traded stocks, the plans for liquidity may be the difference in getting real cash out of a deal in a timely fashion.
Beyond the attractiveness of a specific deal to investors, the big factor investors need to consider is how to minimize their risk by making multiple investments and only doing so from a portion of their total investment pool. The risk will vary for the individual deals offered, but all startups have a lot of risk and many, perhaps most, will fail. Although there are specific limits on investments made through crowdfunding, investors should consider their own risk tolerance and financial situation when considering how much they want to risk in these types of investments.
While it won’t fit every deal, crowdfunding is a new and powerful tool for companies to use to raise capital and to democratize the opportunities to invest in early stage private companies. It will allow anyone to play their favorite character from “Shark Tank” and to possibly fund the next big thing. For more information about Mississippi Intrastate Crowdfunding, please see the secretary of state’s website.
Tony Jeff is the president and CEO of Innovate Mississippi. He can be reached at tjeff@innovate.ms.